Transfer Pricing Insider
Volume 3, Issue 1
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Global Employment Organizations Get a New Lease on Life
Rachel Halpert, is Partner and Allyson Stoll, is Manager of the Metro New York Office of Ernst & Young, LLP
GEOs are starting to see a resurgence as a means to address risk, employer and employee compliance, and tax planning with international assignees, although the increased control for the company does not come without costs.
The old concept of a global employment organization (GEO) may have been buried in the minds of many people, but reports of its death were premature. GEOs are starting to see a resurgence as a means to address risk, employer and employee compliance, and tax planning concerns with international assignees. However, with the evolution of GEOs over the past few years, an organization needs to ask whether a GEO fits its corporate strategy and its employees' needs, and whether the administrative challenges and costs are in line with the effort. As every company has its own priorities and complexities, there are various reasons why a GEO may or may not be the vehicle to meet its strategic goals. It is, therefore, vital that the numerous pros and cons of a GEO structure be evaluated and discussed among the many stakeholders—including human resources (HR), finance, tax, payroll, and "C-suite" executives—to get the broad buy-in required to ensure that a GEO will be successful.
Role of GEOs in the Marketplace
A GEO, often formerly described as an employee leasing company, is a corporate entity that employs the globally mobile workforce of a company. Once an international assignee is identified, the GEO hires the employee, who is then sent on an international assignment. Without the establishment of the GEO, the individual would typically remain an employee of his home-country employer (often the current employer) and be deployed to work in the host country. The GEO provides the assignment letter or employment contract to the individual, pays the individual's salary and benefits, and provides the administrative support required to orchestrate the assignment. The GEO then bills the costs of the employment to the host company where the individual is providing services and charges a markup on the costs of the employee as payment for its administrative duties. In essence, the GEO can serve as a taxable-income buffer if the employee's activities create a host corporate taxable presence (or permanent establishment (PE)).
Should a PE be created, the host-country tax authorities will question for whom the employee is providing services. As the GEO is the legal employer, it is the first entity that the host-country tax authorities will seek to tax. Since the GEO should be compensated at arm's length under the appropriate transfer pricing regime, its profits related to its administrative duties are likely minimal. Depending on the extent and nature of its activities, this may result in the benefit of shielding the home company and reducing income ultimately subject to tax in the host country. In this manner, the home company's operating profits are protected.
The new GEO structure can take many forms, depending on the goals of the structure, the assignee locations, and the parent organization. At its heart, an "ideal" GEO structure will centralize all assignments and related administrative functions to ensure consistency in the application of corporate policies and risk control. Instead of assignments from various home locations to host locations, which can result in hundreds of country combinations for large programs, all employees will move through the GEO. As a result, each assignment is consistent regardless of the home- and host-country locations.
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